Financing energy efficiency: Barriers, instruments, and pathways to scale

Peer-reviewed paper 3-176-26

Energy efficiency is widely recognised as the most cost-effective solution available to reduce energy consumption, cut greenhouse gas emissions, and enhance energy security. Yet a persistent and large investment gap separates what is economically justified from what is actually financed. This paper analyses the barriers that explain this gap, from small and fragmented projects to the risk aversion of commercial lenders and structural split incentives that misalign costs and benefits, and examines the principal instruments developed to address them. The analysis proceeds from traditional public financing tools, subsidies, grants, fiscal incentives, and zero-or low-interest loans, through progressively more market-based mechanisms: Energy Performance Contracts delivered by energy service companies, Pay-As-You-Save and on-bill financing, Property-Assessed Clean Energy financing, green mortgages, white certificate obligation schemes, feed-in tariffs for energy savings, and carbon taxes and emissions trading systems revenues as sources of public co-financing. The paper further examines cross-cutting enablers, including de-risking instruments, project aggregation, one-stop shops, and secondary markets. For each instrument, it considers the underlying logic, the market failure addressed, the empirical evidence on effectiveness, and the conditions for success or failure. The paper concludes that no single instrument is sufficient: a layered policy architecture combining direct public support, risk transfer mechanisms, and market-based incentives calibrated to national context and sector offers the most robust pathway to closing the energy efficiency financing gap.